What turns your credit card into a ticking financial time bomb?

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I would say that a credit card has emerged as a very useful tool to go out and shop or to shop online for that matter. It is a good replacement for cash if wisely used.

What is meant by wisely used?

A credit card gives you the feeling that you can buy now and pay later. Well this is the case for sure however the day on which you have to pay comes sooner or later.
What a lot of users do not realise is the responsibility that comes with a credit card.

Shopping means using your credit card

When we go out to shop there are a number of offers that are on display. These offers are like financial traps laid out to make us spend more or to make us buy things that we do not need.
Having a credit card in our wallet gives us a sense of an enhanced buying power.

Some common mistakes credit card users make

When a person receives a credit card for the first time he receives a credit card limit which specifies the amount which he can spend using that particular credit card of his.
Not knowing how much of this limit a person should use can lead to a credit card score getting lowered.

Do not use entire credit card limit

In excitement people tend to use up the entire credit limit. This is a wrong practice.
The way a user uses this limit determines his credit score and also any future enhancements to the credit limit he already has.
A user should try to ensure his spendings in such a way that the outstanding on the card does not exceed 30% of the credit limit available to him.

Use less than the 30% credit card limit is something that may not be communicated to you by the credit card company however this is the way to to maintain a healthy credit utilization ratio.
In case this limit is exceeded a user can skip using the credit card for a month or two to bring down this ratio.

Always make full payment of your credit card dues

Not paying the entire credit card payment is a big mistake. Try to avoid the pitfall of not paying the entire amount.
By paying just the minimum amount the credit card company charges a huge amount as interest that can be anything in the 25-40% depending upon the credit card company and its policy.

Never fall for this kind of arrangement as this can lead to serious financial consequences.
A credit card company takes a huge rate of interest on the unpaid amount and this can seriously harm your financial condition.

Use credit card to withdraw cash from ATM

This has a mistake as a 2.5% processing fee gets charged the moment you use your credit card to take out money from the ATM.
Besides that this also means 40-50 % rate of interest gets levied on the amount you withdraw. Thus never use this feature.

The risk of markup on foreign transactions

For foreign transactions there is a markup fee to be paid on transactions that are not in your native currency. These transactions come under the category of foreign transactions.
If you are from a developing economy and travelling to an economy where the currency is stronger the effect can be even more profound.

In such a scenario the credit card usage hits the consumer in a couple of ways.
First there is a foreign currency conversion charge that is above the amount for which you do the purchase.
The second is the rate of conversion. The rate at which a credit card company converts the transaction from the foreign currency to your local currency is often not very transparent and in most cases puts the user at a disadvantage as compared to the user doing the transaction directly in foreign currency that he takes from a forex provider in cash after doing due diligence about the conversion rates.
In order to avoid the risk of handling cash and avoid the credit card charges it is advised to use a prepaid forex card which both reduces the risk and gives the user lesser exposure to currency fluctuations.

Final thoughts

A credit card can be a very useful tool if used properly, however the utility turns into a weapon of self destruction if it is used without any financial wisdom.
Its unchecked use can lead to financial troubles and lowering of your financial score.

It can also lead to financial debt and loss of peace of mind. Thus in the end it is all about a person that uses the credit card as something useful or as something that would destroy his financial balance.

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